Fuchs Petrolub SE's (FUPEF) Management on Q2 2017 Results - Earnings Call Transcript

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About: Fuchs Petrolub SE (FUPEF)
by: SA Transcripts

Fuchs Petrolub SE (OTCPK:FUPEF) Q2 2017 Earnings Conference Call August 1, 2017 5:00 AM ET

Executives

Thomas Altmann – Head-Investor Relations

Dagmar Steinert – Dagmar Steinert

Analysts

Daniel Buchta – Main First Bank

Markus Mayer – Baader-Helvea

Michael Schafer – Commerzbank

Oliver Schwarz – Warburg Research

Ben Orzelek – UBS

Heiko Feber – Bankhaus Lampe

Operator

Ladies and gentlemen, thank you for standing by. I'm Yotai, your Chorus Call operator. Welcome and thank you for joining the Fuchs Petrolub Analyst Conference call. [Operator Instructions]

I would now like to turn the conference over to Thomas Altmann. Please go ahead.

Thomas Altmann

Good morning, ladies and gentlemen, and a warm welcome from our side to the H1 conference calls. My name is Thomas Altmann, Head of Investor Relations at FUCHS. On the call with me today is our CFO, Dagmar Steinert. Dagmar will give you a short presentation on the financial performance of the FUCHS Group in the first half of 2017, which is usually followed by the Q&A session. You can find the presentation on the IR section of our website.

With this I would like to hand over to Dagmar.

Dagmar Steinert

Thank you Thomas, and also good morning from my side, ladies and gentlemen. Thanks for joining our conference call. I would like to start with the highlights of the first half of 2017.

As expected, the Fuchs Group is growing profitably. We saw solid volume growth in all regions and overall we increased sales. Our earnings increased by 4% and our margins were negatively affected by higher raw material prices, as well as a higher cost base, due to the growth initiatives. Therefore, we reaffirm our earnings outlook for the financial year 2017 and raised the sales outlook.

Turning to the next chart, the quarterly sales development. You can see that our sales increased half year-to-half year by 9.8% to EUR1.2 billion. As I said before, this was mainly volume driven. And you can see the different development in the quarters of 2016 and 2017, we reached a new level with over EUR600 million.

On the next chart, going a bit more in detail in the development of sales. You see a strong organic growth of 7.4%. We have a slight external growth that's due to our acquisitions in 2016 in North America. On the currency side, we still have a positive effect, but declining. I'm coming now to the development of the regional sales growth. Sales in Europe increased organically by 4.4% and that was mainly in Central and Southern Europe. We see in Europe a slightly negative currency effect, due to the weak British pound.

In Asia-Pacific, Africa, our sales rose significantly and this was mainly driven by higher volumes. The strongest growth we've seen in China. In this region, we still have a tailwind from currencies. We see a stronger South African rand and a stronger Australian dollar. The other way around, opposite, is the Chinese renminbi.

In Americas, we were able to increase our sales by 19%, which is a significant growth, and organic growth was 7.7%. The acquisitions of the year 2016 in this region contribute 6.4% to that region. And we've got a significant currency effect, a positive effect of nearly 5%.

If I come now to the income statement for the first half year; already mentioned the increase of our sales by close to 10%. You can see that our gross profit increased by 5.8% to EUR452 million. We see lower margins as a result of higher raw material prices as well as the higher cost base due to our growth initiatives.

And as you know, we always face a time lag in passing on the raw material price increases to our customers. At EUR190 million, EBIT came in close to 4% higher than in the same period last year. The tax rate was 30.6% compared to 31.9% in the first half of 2016. Therefore, our earnings after tax rose by 5.5% or EUR7 million.

If we now look at the EBIT development on a quarterly basis, you can see that we had a strong second quarter in 2016 and a normal first quarter in 2016. In 2017, we had a strong first quarter and a good second quarter. So it is opportunistic to compare the half year figures and not the quarterly figures.

If you now turn on to the EBIT by regions, you can see that results of the regions show a mixed picture. Europe recorded an EBIT of EUR94 million, that's EUR1 million less than in the previous year. In Europe, we see raw material price increases and the result – and the delay of passing it through to our customers.

In Asia-Pacific, Africa, we have increased EBIT by EUR5 million or 8.7% and we see increases mainly in China, as well as in Australia and South Africa. Americas increased earnings by EUR1 million and there we see a mix effect and as well delayed sales price adjustments and partly a rising cost base related to the start-up of our new grease plant.

I would like now to come to our cash flow statement for the first half year, where we record a solid cash flow. The free cash flow before acquisitions is EUR53 million compared to EUR72 million in the first half of the previous year. We see a rise in net operating working capital, which is caused by significant expansion of our business activities in the second quarter.

The average tied-up period remained stable at 78 days. And we see a rising CapEx number, which was planned, due to our growth initiatives. Therefore, we saw a solid free cash flow of EUR52 million. Our employees’ number is quite stable. It increased by roughly 130 people globally and it's now over 5,000.

To sum it up, our earnings targets are met in the first half of 2017, and our sales targets are exceeded. We faced higher costs as a result of our growth initiatives and we see increasing raw material prices, which can only be passed on with a time lag. And as mentioned before, we have a solid free cash flow. Therefore, we reaffirm our earnings outlook and we raise our sales outlook. We expect now for the full year 2017, an increase in sales from 7% to 10%. Our EBIT, we expect to increase between 1% and 5%.

And that in a short – yes, in the short presentation, our – it's an overlook for our first half year figures and now I'm happy to take your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Daniel Buchta with Main First Bank. Please go ahead.

Daniel Buchta

Yes, good morning. Thank you very much for taking my three questions. The first one is on the margin side. Here we have seen a 150 bps dilution. The reasons you mentioned already, but what can we expect here in the second half, especially if you mentioned the raw material cost inflation, can you also quantify, approximately at least, the impact from the raw material cost inflation and the less favorable sales mix effect? That's the first one.

The second one on the organic growth. It was again good in the second quarter and for the first half, obviously, even better, because of the strong first quarter. And what do you expect here for the second half, especially given the higher comparison base in Q4? Do you think a slowdown here slightly, especially from the weaker automotive environment and from the very high comparison base in Asia, Africa. And the last question, currently we have the discussions on the German automotive producers with the diesel scandal and the potential cartel issues. Do you see here any risks? Thank you very much.

Dagmar Steinert

Yes, thank you. On the margin side, yes, we've got a lower margin than in the year before and that's mainly due to our increasing raw material prices. That's the bigger portion compared with our higher cost base. And as we have always a time lag between 3 to 6 months on passing on raw material price increases, we will see some in the year – some benefits in the year 2017, but of course, not a full relief or something like that. If you look at our sales expectations for the full year 2017, as we said, we expect it to be – to come out between 7% and 10%.

And in the first half year, we see a number of 9.8%, so it's at the upper range. You have to take into account the effect of the currency rate, because in the first half year, we still have – on the currency side, we have 1.4%. And in June it started to change. So the first month 2017, we had a tailwind and now we have a headwind. So I don't know how strong that will be or how long it will last. But therefore in our adjusted guidance, there is no significant currency effect in it.

Daniel Buchta

But underlying, you see no major trend changes so far from what you see – know from July?

Dagmar Steinert

No. And your question regarding the diesel scandal in Germany, I don't see there any risk for us. Our products, we've got products for, both for petrol cars, for diesel cars, and if you look at our customer structure, our customer base, 30% of our sales are with OEM and first-tier suppliers. But that's not only passenger cars, it's truck, the heavy vehicles, it's offroad. And it's not only special engine of gear oils there, as well metal working fluids, corrosion prevention, all these industrial lubricants in it.

Daniel Buchta

Thank you very much.

Dagmar Steinert

Welcome

Operator

The next question comes from the line of Markus Mayer with Baader-Helvea. Please go ahead.

Markus Mayer

Four questions for me as well, if I may. The first one again on this raw material cost increase. Do you mean that you, can you compensate for this increases and is this then see a recovery in margins, do you mean margins per ton or margins in the P&L? It's the first question.

Second question is, the sequential lower organic growth we saw from Q1 into Q2. So from above 9% to below 6%. Were there already several price increases in there? So maybe some words on this. And then given your recent investment in Americas, maybe you can update us on your currency sensitivity. And then the last question, the increase in net working capital, can you maybe shed some light if this was due to the ramp-ups or due to strong demand going into Q3? Thanks so much.

Dagmar Steinert

Regarding your question to material cost increase and margins, we've seen rising raw material prices in the first half year of 2017. And in our top line, there is not much in it in passing through any to our customers, because you have to take into account this time lag of three to six months . The raw material prices increased more in the second quarter. Therefore, we won't see everything on the top line in this year.

That's not possible due to this time lag. And if you look at, you mentioned the growth rates in Q1 and Q2, but you have to take into account that these quarters in 2016 and 2017 are quite different. You can't really compare Q1 2017 with Q1 2016 and Q2 2017 with Q2 2016, because they are different in performance and structure. And in 2016, there have been like this one or the other one-time effects. Therefore, it's more reasonable to compare there the half year, the full six months.

Regarding your question to the net operating working capital, the increase is due to the strong demand we've seen in the second quarter. And of course, a portion of the increase is due to the fact that we've got quite some product shipping from Germany to China.

Markus Mayer

And then the last question on the currency sensitivity?

Dagmar Steinert

Pardon. The...

Markus Mayer

The question on the new update on the currency sensitivity given your recent investments in the Americas.

Dagmar Steinert

Yes, our investments in, do you mean our daughter in – our company in North America, or this acquisitions from 2016, which are located in North America as well, because …

Markus Mayer

Basically for all investments there is a new currency sensitivity for your group, let us say by x-cent increase you have this kind of impact on your EBIT or top line or whatsoever.

Dagmar Steinert

No. Well the currency effect is mainly translation. And on the purchase side, of course, we have some effect due to the fact that some of our raw materials are always linked to U.S. dollar or euro, but we can't quantify that effect, plus nothing has changed there.

Markus Mayer

Then only one add-on question on this raw material question. In Q1 conference call, you said that you expect that 1% to 3% higher raw material costs in 2017. This kind of guidance or expectation is still valid.

Dagmar Steinert

Well we've seen different developments, like base oils had higher increase. On the other hand, base oils are not the most expensive part of our raw materials. Additive chemicals, that's more of a question of availability of demand and supply, how the price development is there. And overall, for the group, yes, I would say it's maybe more regarding 3%, 1% to 3%, yes, it's significant.

Markus Mayer

Okay thank you so much.

Operator

The next question comes from the line of Michael Schafer with Commerzbank. Please go ahead.

Michael Schafer

Thanks for taking my three questions as well. On the first one, it's on the European business. In the first half, your EBIT fell short, comparable level in the first half 2016, probably due to raw materials. Looking into the second half, you are facing rather tough comparisons. And so the question is, listening what you just said on the raw material price pass-through, is it fair to assume that you will probably find it hard to match last year's second half results in the European business? This would be my first question. The second one is on the APAC. We have seen now another sequential decline in profitability and EBIT margin. So how should we think about it in the quarters to come, given the businesses you have generated there, in terms of margin evolution?

And last not least, the third one. On the other line, a bit striking basically that this came out in the first half significantly lower than the first half last year, while last year, at a full year you came out of the other line at minus EUR14 million. So is this just a fair run rate to go for the whole year or shall we think of rather something different here? Thank you.

Dagmar Steinert

Well thank you for your questions. In Europe, in the region Europe, as you mentioned, we faced the raw material price increase. And of course, in Europe, we see effects of the currency regarding the U.S. dollar. And I'm quite confident that for the full year, or I hope that we will match the earnings of 2016, but we won't see there a big increase.

Asia-Pacific, Africa, the margin, yes, it's down, but that's a question of product mix and raw material prices again. The other line, where we had a higher number in 2016 that should be a bit less in 2017. We had a higher inter-company earnings or shipping in 2016.

Michael Schafer

But by saying should be less than last year, should we think about single digit then basically, or what I'm talking about in 2017? Because in the years before in 2014, 2015, you recorded something like EUR6 million, EUR7 million negative on this line. So '16 has been an extraordinary year.

Dagmar Steinert

It would be significantly less. And if you look at the half year figures, there we have a number of – what is it in...

Michael Schafer

Minus 2.6 first half this year.

Dagmar Steinert

Minus 2.6, you add three [ph]. So at the end it would be a single digit number.

Michael Schafer

Okay, thank you very much.

Operator

Your next question comes from the line of Oliver Schwarz with Warburg Research.

Oliver Schwarz

Thank you for taking my questions. I'd like to start with your outlook. Ms. Steinert said that pass through of raw material costs may take one to two months. Looking at price charts on base oils, judging from what additive producers said, especially base oils seem to have made a big run up. Since the start of this year's additive producers, I haven't seen any very substantial price increases from their side in their recent reporting. So there might be still something to come. So if we assume that you will start to implement higher price starting in H2 2017, that obviously should have a positive impact on your sales level.

So is that just a substitution of organic growth coming from volume growth in the first half by assumed price rises in the second half? So should we see volume growth to slow down and be replaced more or less by the increase in selling prices to come up with the 7% to 10%, let's say, sales growth you're guiding to, because if volume growth can only remain at this level, we should see numbers much higher than that, if you're still implementing or trying to implement price increases in the second half of this year? That would be my first question.

Second question would be in regards to your inventories. Again, raw material prices seems to have made a run up, mostly by the start of this year. So if I compare inventory levels, you seem to have – there's only – round about 6%, 7% increase in inventory since the start of this year, which would given price increases of the raw materials, which what points to basically lower inventory levels when it comes to volumes. Is that a correct assumption? How does that fit with the volume-driven increases in sales? That would be my second question.

And third question in regards to the growth of the first half year. Is that mainly driven by existing customer industries, let's say, coming out of the dark again, so basically, for example, in the U.S. shale oil, shale gas business, picking up again, maybe the trough in the coal and steel mining industry has been hit in the U.S. and we see now some kind of reversal, or is that basically based on the shift in your customer groups? So is that basically a shift more to the automotive customers from the automotive sector and less so with customers, for example, in the mining and oil production sector, just to compensate for that and to generate the growth we are seeing at the moment?

That will be my three questions. Thank you.

Dagmar Steinert

Yes, thank you, Mr. Schwarz. Regarding your question with the raw material price increases, our time lag passing it through is one to two quarters, not months. Maybe I got you there wrong. And the yes we’re seeing raw material price increases in the first half year and – but more strongly in the second quarter and base oils increased significantly. And in an environment where prices are increasing, of course, you take your time to go out to the customer and to negotiate price increases. But if raw material prices are going up even further, you might need a second round or third round and therefore, we won't see the full benefit, definitely not in this year.

Our outlook for the sales growth of 7% to 10% for the full year with, yes, growth of close to 10% in the first half year is on one point, it's currency-driven, because we see a slowing down of these currency, or reversal of the currency effect.

And regarding volume growth, in the first half year our sales growth was mainly volume-driven and we've got a short visibility of our orders. Order backlog doesn't play any role for us and it's difficult to say and at the beginning of the year, we wouldn't have expected the overall environment to do develop like that.

Our inventories, yes, in our inventories, we've got 6% to 7% increase and – but there of course it's the balance sheet number and you've got some translation effect in there. And there is no lower level summer with regard to volume in there.

Our sales growth – our volume growth is a lot with existing customers in that industries, for instance, in the U.S., we are stronger in mining and oil and gas. In China, we are very strong in the OEM business, in the retail business, but there is no shift in the customer base. The customer base is very stable.

Oliver Schwarz

Can I have an add-on question on that what you just said?

Dagmar Steinert

Yes.

Oliver Schwarz

You said, okay, first half of this year we saw major price increases, especially in base oils and I would completely agree on that. But then you were saying, and we have to put that or transfer that to customers within, let's say, several price rounds because we can't do that just in one go.

And I would say, okay that's understandable, but wouldn't that expand the time you require to pass on raw material price increases beyond the two quarters, for if you're saying the full effect of higher prices compensating for raw materials will be only seen past the end of 2017, because if you put price increases based on how material cost increases in the first half year into the second half year, and it still won't be enough to compensate for that, that would be like more than two quarters, wouldn't it?

Dagmar Steinert

Well with some contracts it might be longer than two quarters, correct, because if you look at our contracts with price variation clauses, there you need to take – see it's a certain hurdle. And if the price increase of these numbers which are negotiated stays below a certain percentage, then it takes of course more time, if you see the price – sales price adjustment. And these one to two quarters, or three to six months, that's just a general rule.

Oliver Schwarz

Okay, I understood.

Dagmar Steinert

Yes. Okay.

Oliver Schwarz

Thank you.

Dagmar Steinert

You’re welcome.

Operator

Our next question comes from the line of Ben Orzelek with UBS. Please go ahead.

Ben Orzelek

Yes. Thank you for taking my questions. Just a question on the U.S. last, basically. Can you quantify the negative impact of the ramp-up you incurred in the United States of the new plant? And can you also please let us know when you expect to see a new plant at full capacity and will there be any capacity additions from that? Thank you.

Dagmar Steinert

Well, the ramp-up costs of our new plant in Chicago in the U.S., of our new grease plant, there we are talking about the depreciation, we are talking about the people, the people who work there, we've got the raw materials to make all these ramp-up products. We expect this plant to run by the end of this year, beginning next year. And well, for capacity we are not thinking in full capacity. Hopefully we will need some time until we have to expand that. I must say it's a really big plant, because we went out of capacity. But to get it ramped up and to get the production on a good level that would be done by the end of this year, beginning of next year.

Ben Orzelek

Okay. And that's when you expect the ramp-up costs to end? Am I assuming that correctly?

Dagmar Steinert

By the end of this year.

Ben Orzelek

Yes. And maybe I'm not clear. Can you quantify the capacity additions, the new capacity you theoretically have through the new plant in the U.S., just to have a feeling on that? Thank you.

Dagmar Steinert

Well, as we didn't have such a modern grease plant in the U.S. before, we only got one in Germany in Kiel, it's totally new. We are able to produce there all these high-end greases for our customers, which we today have to ship from Germany to the U.S. market. And as you might know in Kiel we are running more or less at the end of our capacity. So it's a new capacity for the whole group. And our concept is to ramp-up the same plant in China as well so that we have three plants for these high-end greases on this Continent.

Ben Orzelek

Okay. And can you say if it's – regarding capacity, is bigger than the Kiel plant or it is the same size or how can we think of that?

Dagmar Steinert

Sorry, it's very – could you just repeat your question please?

Ben Orzelek

Yes, regarding capacity, is it comparable to the plant in Kiel, is it bigger, is it smaller, how can we think of that?

Dagmar Steinert

It's bigger, because it's – I think it's a bigger ground. But as we build it up on a modular basis, like we always do with our plants, we just filled in half of the building. So if you would like to expand capacity, it's easily done.

Ben Orzelek

Thank you.

Dagmar Steinert

You’re welcome.

Operator

The next question comes from the line of Heiko Feber with Bankhaus Lampe. Please go ahead.

Heiko Feber

Yes. Thank you. Ms. Steinert, just one question left from my side, it's regarding your EBIT expectation and margin expectation. So we had around 15.2% in the first half of this year and if I take your sales guidance and your EBIT guidance and take the midpoint, your margin guidance has come down to around 15.5% from 16.1% before. But in order to reach the 15.5%, you would on average have to reach around 16% margin in the second half. Where do you see that coming from, that improvement compared to the first half? That would be my question. Thank you.

Dagmar Steinert

Well, we expect a bit of improvement on our top line regarding the increase of sales prices. Of course, then it's a question, for instance, the higher cost base in Americas is the ramp-up finished by the end of the year or maybe one or two months earlier, it's difficult as well. And then, of course, yes, we don't know how the currency develops and – but I'm confident that we will see a good second half of the year.

Heiko Feber

Okay. Thank you.

Operator

There are no further questions at this time. I hand back to Thomas Altmann for closing comments.

Thomas Altmann

Thank you. Since there is no further question, we will end the conference call now. Thank you all for joining us today and for your interest in FUCHS. If you have any further questions, please don't hesitate to contact me. We will be back with the conference call on Q3 on October 27. Thank you and goodbye.

Operator

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.